PREAMBLE: When Antoine van Agtmael coined the term “emerging markets” in 1981 as an upbeat alternative to “the third world” or “the developing world”, he could not have imagined how prescient he would prove to be.

Plagued with poor distribution systems, low and highly disparate income levels, unpredictable revenues, high pollution levels, infuriating and inefficient governments, insufficient infrastructure and services, corruption, and inadequate protection against piracy, emerging markets are still among the most difficult in the world. These markets are more varied and volatile than the developed ones. There is little money around as the average incomes are much lower. Cultural complexities are baffling and tastes are extraordinarily fluid as there is little brand loyalty and the incomes are often unstable. But the opportunities are also extraordinary. The markets are huge and economic growth rates phenomenal. Brainpower is cheap and abundant and education systems are now well equipped to keep producing hordes of good quality graduates and world-class professionals. Quite often the new ideas that emanate as a response to local deficiencies get transformed into coherent technological or management advancements applicable anywhere in the world.

Some of the countries from these “emerging markets” are now getting ready to play a leading role in the world economy and business. They are starting to produce some of the biggest and the most efficient companies which are challenging the developed world’s major corporations, which, for a long time, have been the pride of their respective countries in efficiency, worldwide reach, expertise, technology, and innovation. According to a recent supplement in ‘The Economist” (from which I have gleaned some of the information included in this essay): “Mexico’s CEMEX is the largest cement company in America, the second largest in Britain, and the third largest in the world. Acer of Taiwan is vying to become the world’s second-biggest manufacturer of personal computers. Brazil’s Aracruz is the world’s largest and most profitable producer of pulp for paper and tissues. Russia’s Gazprom controls more gas reserves than all the West’s big oil firms combined.” The West is now beginning to realize the potential of the emerging markets’ fast growing economies and corporations which are fast building powerful global brands such as Samsung of South Korea in electronics. Haier is the fourth-largest manufacturer of home appliances. The rich world is finding it difficult to contend with this reality. However this is not a zero-sum game where the emerging world’s gains would represent developed world’s losses. Instead globalization and increasing trade should enhance efficiency and productivity and are likely to benefit all involved. Economic rivalries in the human history are known to have provoked creative responses. Sometimes I feel that, caught in the cobwebs of their internal political and economic shenanigans, many people in the West do no yet fully understand how serious the challenge from the leaders of the emerging world has become. Many of them have already emerged. The optimism that prevails in the emerging markets offers a contrast with the mood in the recession-hit West. Some 94% of Indians, 87% of Brazilians, and 85% of Chinese, for instance, report to be satisfied with their lives and optimistic about the future. Emerging markets are now also the vanguard and the most ardent supporters of globalization. According to 2009 Pew Global Attitudes Project, more than 90% of Indians and Chinese think that external ties and trade are good for their countries, compared with only 65% of Americans.

INNOVATION, COST-REDUCTION, AND PRODUCTIVITY: Governments in the West are struggling to put their fiscal pictures in order and the consumers are having to confront with the spectre of unemployment and shrinking wealth. Hence everyone is beginning to appreciate the merit of austerity. Dampened growth in the West will create more demand for frugality especially as the need for heightened retrenchment comes at a juncture when the demand for welfare services is rising, fuelled by the retreat of baby-boomers and the rising health-care costs. Rather than plain and mindless cost-cutting, emerging markets are showing the way by eliminating costs through redesigning products and processes from scratch. Western bosses like Carlos Ghosn are in awe of India’s frugal innovations. Jeff Imelt’s GE wants to reduce costs through cheap product supplies from India and China. Vodafone sends its executives to India to learn about its low-cost business models.

The world’s centre of economic gravity is slowly but surely shifting away from the West and towards the emerging markets as, apart from registering slower economic growth, the developed world is losing initiative to the emerging markets in the type of ground-breaking ideas that transform industries. The emerging world is enjoying the most impressive growth in history. On purchasing power parity basis, its share of global GDP increased from 36% in 1980 to 45% in 2008 and is set to grow to 51% in 2014. Emerging-market consumers now outspend the Americans and in 2009 their share of global consumption had gone up to 34% against America’s 27%. Over the past five years China’s annual growth rate has been in excess of 10% and India’s more than 8%. 70% of the world’s growth over the next few years is expected to come from the emerging markets, with 40% coming from only two countries, China and India. This dynamism shows no signs of diminishing and the economists expect growth in emerging markets to be four percentage points higher than the growth in the rich world for at least the next five years. These countries are no longer the source of cheap labour and low-cost skills; instead they are the world’s sources of economic growth and first-rate brainpower and are becoming breeding grounds of innovation and technological advancement, producing new breakthroughs every day. Their entrepreneurs are reinventing systems of production and delivery and are not afraid to experiment with new business models. They are redesigning products and processes to reduce costs and increase efficiencies in proportions that have not been witnessed before in the recent history and hence are able to make established products for remarkably lower costs, such as $3,000 cars, $300 laptops, $70 fridges, and $30 mobile phones with 2 cents a minute nationwide services. A lot of R&D action is thus shifting to the emerging markets. Fortune 500 companies now have about 100 R&D facilities in China and 63 in India. GE’s vast health-care R&D centre in Bangalore has cost over $50 million and is its biggest anywhere. Cisco has spent more than $1 billion on building a second global headquarter –Cisco East- in Bangalore. Microsoft’s R&D centre in Beijing is its largest outside Redmond. A quarter of Accenture’s workforce is now based in India. Huawei, a Chinese telecoms giant, applied for more international patents than any other firm in 2008 and has become the world’s fourth-largest patent applicant. An Indian company VNL has redesigned mobile-phone base stations so that they can run on solar-powered battery, thus helping poor communities without access to electricity grid. Bharti Airtel has reduced the cost of providing mobile-phone services by thinking up to share radio towers with competitors and contract out network construction, operations, and support to specialists such as Ericsson. This in turn means that the entrepreneurs can use mobile phones to bring sophisticated services in everything from healthcare to banking to rural population. For example, Kenya leads the world in money transfers by mobile phones and many other African countries are following suit. Tata Consultancy Services (TCS)  has devised a way to use mobile phones to connect television sets to internet, as in India televisions are much more common than computers. This allows people to serf the web through a remote control without needing keyboards. TCS has also invented a water filter that uses rice husks to purify water. Remarkable, as it uses one of the country’s most common waste products (rice husks) to tackle its major health problem (contaminated water).GE’s health-care laboratory in Bangalore has developed a hand-held electrocardiogram (ECG) which is the size of a book, is easy to use with only four buttons, can also run on the batteries, costs only $800, and has reduced the cost of an ECG test to just $1. Some hospitals in India are applying a combination of scales and specialization to drastically reduce costs of health services. An open-heart surgery in Bangalore costs about $2,000, compared with $20,000-100,000 in America, with success rates as good as in the best American hospitals. Now every year hundreds of thousands of Americans travel to India in search of affordable health care. Chinese are equally good at economical innovation. For example, Mindray excels in cheap medical products and BYD has radically reduced the expensive lithium-ion batteries from $40 to $12 apiece. As we all know, Chinese also stand out in making ingenious ‘copies’ of high-tech gadgets and luxury items. Some of the more exotic phones look like watches or packets of cigarettes and have striking new features such as solar chargers, powerful speakers, telephoto lenses, or ultraviolet lights to detect forged currency. Thus, among the billions of people who live in the emerging markets, increasingly more consumers are having access to goods and services that were once limited to the elite and most of the innovation is focused on developing products and organizing processes to reach billions of consumers who are just entering the global market. Emerging markets are also learning to compete on productivity and not just low cost. In 2009 productivity in China grew at 8.2% as compared with a growth of 1% in America and a decline in many Western countries.

GLOBALIZATION: The United Nations World Investment Report estimates that there are now about 21,500 multinationals of emerging markets’ origins. Some of these –such as India’s Bharat Forge in forging, China’s BYD in batteries, and Brazil’s Embraer in jet aircraft- are as good as anybody in the world. In two years from 2006 to 2008 the number of BRIC companies on the Financial Times 500 list has more that quadrupled from 15 to 62. The theory that the globalization is piloted by the West and its consumers reap most of the benefits is no longer the whole truth. Consumers in emerging markets are getting richer faster than their equivalents in the rich world. While Emerging markets manufacturing giants such as India’s ArcelorMittal (world’s largest steel company that is bigger than the next three combined) and Mexico’s Cemex are eating up western manufacturers, others like Infosys and Wipro are taking over office work. Lenovo, created less than 20 years ago, bought IBM’s PC business five years ago and is now the world’s fourth-largest PC-maker. South African Breweries, confined to its home country just a few years ago, is one of the world’s three largest beer companies. While the Western companies reel from the recent recession, emerging-market companies are on the prowl. Recently, TCS has bought Citigroup global services for $512 million and HCL, another Indian technology group, has acquired Britain’s Axon group for $672 million. Reliance Industries is chasing LyondellBasell Industries in a $ 14.5 billion bid and Bharti Airtel is in the process of buying Zain for $9 billion. Hence instead of Western companies traditionally buying cheap manufacturing in the developing world, emerging-market companies are now buying sophisticated corporate apparatus in the West to get their hands on skills, brands, and distribution channels that will enable them to compete with the world-class companies. For example, Hindalco, an Indian aluminium company, transformed itself into a global force through a sequence of well-planned acquisitions, boosting its revenues from $500 million to $15 billion in a span of seven years. The world’s top two banks are Chinese and are set to play a role on the world stage.

MANAGEMENT AND SOFT STUFF: The emerging markets are also developing their own characteristic management ideas and the Western companies will increasingly find themselves learning from their emerging markets rivals. The companies in emerging markets are starting with the needs of some of the world’s poorest people, who were hitherto excluded from the market economy, and are reshaping products and entire production processes to meet those needs. This enables them to cut costs by serving ever more customers and to apply economies of scale to new areas. They are transforming the methods about achieving economies of scale as instead of established wisdom of ‘scaling up’ the emerging market firms frequently look to scale out which –instead of reducing costs by centralizing- means engaging a wider range of people in the process of production and distribution. This helps them gain bigger markets without the drawbacks of a centralized bureaucracy. Also instead of resembling fixed armies looking for opportunities, emerging market firms are often loose networks that are ceaselessly rearranging themselves in response to quickly changing landscape. This helps companies to mobilize resources when the need arises. Chinese are particularly good at this as many of their companies are equipped to use their huge supply chains to produce a wide variety of goods in response to demand. One of the developing world’s most influential business models has involved bringing mass-production to sophisticated services that were traditionally controlled by professionals with little regard for efficiency gains. This was set in motion by India’s outsourcing firms, which continue to expand and move upmarket. Emerging-market entrepreneurs are now looking to apply these techniques well beyond IT and the back office in areas –like legal services- requiring higher and more intricate levels of expertise. For example, Indian consultancies are now challenging Western ones in complex services. Emerging markets education is also improving very fast and the top institutions are now surely world-class, some of which rate among the best in the world. India and China each produces more graduates with advanced degrees in engineering and computer sciences than the US and it does not count the large number of Indians and Chinese that are included among the US graduates. Infosys’s 335-acre sprawling campus in Mysore is a city in itself and is one the largest and best corporate universities in the world. It employs a permanent faculty of over 250 and trains about 10,000 new employees per year apart from providing advanced training for thousands of existing employees. Investment in talent is now paying huge dividends and be an important factor in the growth of emerging markets in the coming decades.

CONCLUSION: Hence, as we can see from the above, the assumptions about the rich world competitive advantage are being challenged as the emerging markets’ firms press forward on a number of fronts and, in the process, wolf down Western rivals. Many established firms are being upstaged by increasingly savage price competition. When the West started losing manufacturing jobs with the advent of globalization, most people expected the rich world to maintain an edge in innovation and thought the clever jobs would stay at home. Not anymore as the emerging markets are unleashing a wave of low-cost innovations that are likely to shake many industries to their foundations. The silver lining though is that, one, the Western consumers, who are confronted with long periods of slow income growth, will be happy to profit from cheaper goods and services. Two, smart ways of benefiting from economies of scale and low-cost innovations could also be used to boost public-sector productivity, such as healthcare systems and communications and transport networks. Three, the innovation emanating from the emerging markets is likely to prod the Western world into getting its act together to face up to the new order and will encourage further innovation in the Western world. This should make the world over all a more prosperous place with a better quality of life across the board.

Meanwhile the emerging-market juggernaut rolls on. The markets for senior talent are much more liquid than they ever were. Previously all great companies grew organically, while the emerging-market campaigners are seeking growth through mergers and acquisitions. More than ever before, they have access to armies of experienced investment bankers and consultants. The sheer size of emerging markets is also an important element as the emerging-market corporate machine is fuelled by almost every sector. At the turn of this century not a single emerging-market company could be billed as world-class and today emerging-market companies are among the world-leaders in more than 25 big industries. The imperative of volumes also plays an important role as the emerging-market companies are preoccupied with finding new markets to eke out on their thin profitability. Indian and Chinese mobile phone companies have been adding 8 to 10 million subscribers a month for several years. Companies like Infosys and ZTE have been growing at more than 40% per year. The West’s largest corporate players have their sights set on the enormous potential of emerging markets. The best Western companies are looking to emerging markets as sources of innovation and growth as the creative energy is shifting to the developing countries.

While the intent of this essay is to focus on the economic and business aspects of the phenomenon, the rising wealth and market power of the major emerging-market countries is also likely to generate geopolitical heft.  Whereas rich Japan and Germany deliberately chose to not to throw their weight around in the world politics, countries like China, India, Russia, South Africa, and Brazil are a lot more politically ambitious in keeping with their size and regional prominence. During the course of negotiations for a new climate-change treaty in Copenhagen last December, when President Obama turned up for his meeting with China’s prime minister, Wen Jiabao, he was surprised to see that the heads of government of India, Brazil, and South Africa were also present. Hence instead of a bilateral talk the meeting turned into a negotiation with an emerging-market block. There have been two BRIC summits in less than last one year and their foreign ministers, finance ministers, and central bank heads also meet regularly. While the flow of aid and investment from rich countries to poor has been declining the major emerging-market economies are flexing their muscles. For instance, China has committed $10 billion in aid and concessionary credit to Africa over the next three years whereas Brazil has invested $10 billion in the continent over the past six years. The fact that the major emerging-market countries’ purchases of exports from poor countries are now very significant and are rising at a high pace also helps their political clout. Hence the geopolitical dynamics are also in a flux and the system that saw the world’s politics dominated by the US and its rich allies is slowly but surely transforming.

Tailpiece: [While it is not the topic of this essay, it pains to realize how cruelly Pakistan has been done in by the narrow vision and self-centredness of its military and its politicians. Countries like Korea, Brazil, Mexico, and Malaysia which at different times in our history were supposed to be Pakistan’s peers now seem to belong to a different world.]

The writer is the author of four books that can be seen at

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